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Venable Back on Hook for $11.25M Facebook Con

By Cameron Finch, Bloomberg BNA

A group of investors that claimed it was swindled out of more than $11.25 million worth of pre-initial public offering Facebook shares won its bid to revive securities fraud claims against Venable LLP, which represented the alleged con artist during negotiations.

ESG Capital Partners LP adequately pled that former Venable partner David Meyer had the scienter — culpable intent — required under the Private Securities Litigation Reform Act, Judge Harry Pregerson of the U.S. Court of Appeals for the Ninth Circuit said July 11. The plaintiff also adequately pleaded state law fraud claims, but its claim for breach of fiduciary duty wasn’t timely, the appeals court said.

The mastermind of the scheme, con artist Troy Stratos, was convicted of wire fraud and money laundering in 2015. ESG’s managing agent in the deal, Timothy Burns, also eventually pleaded guilty for embezzling investors’ funds.

$11.25M Con

In 2013, ESG sued Venable, claiming that the law firm assisted Stratos — operating under the alias “Ken Dennis”— in the scam. ESG alleged that Stratos conned it into believing that he was buying Facebook shares on behalf of Mexican billionaire Carlos Slim.

According to the complaint, Meyer assisted Stratos in hiding his identity, helping him set up a fake company and opening up bank accounts. On numerous occasions, Meyer confirmed the legitimacy of “Dennis” and the Facebook deal, investors said.

Four months after ESG’s final payment, investors still hadn’t received their Facebook shares. When ESG informed Venable that it planned to take legal action, the law firm’s counsel said it had no record of the transfers.

Meyer was terminated in 2012.

The U.S. District Court for the Central District of California dismissed the claims in 2013, saying that ESG didn’t sufficiently allege its claims.

ESG provided enough facts to show that it relied on Meyer’s representations and that Meyer knew of Stratos’ scheme, the appeals court said. For instance, Meyer corresponded with Stratos at the same e-mail address that “Dennis” used, the court said.

Likewise, ESG didn’t make its first deposit until after Meyer reassured it about the deal’s legitimacy, the Ninth Circuit said.

ESG also adequately pleaded parallel state law claims, the appeals court said, sending the case back to district court.